Ark Restaurants Corp.

Greetings and welcome to the Arc Restaurant's first quarter 2023 results conference call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Christopher Luck. Secretary, thank you.

You may begin. Thank you, Operator. Good morning and thank you for joining us on our conference call for the 2023 first quarter ended December 31st, 2022. My name is Christopher Love and I am the Secretary of Arc Restaurants. With me on the call today is Michael Weinstein, our Chairman and CEO, Anthony Sirica, our President and Chief Financial Officer, and Vinnie Pascal, our Chief Operating Officer. For those of you who have not yet obtained a copy of our press release, It was issued over the news wires yesterday and is available on our website. To review the full text of that press release, along with the associated financial tables, please go to our homepage at www.arcrestaurants.com. Before we begin, however, I'd like to read the Safe Harbor Statement. I need to remind everyone that part of our discussion this morning will include forward-looking statements and that these statements are not guarantees of future performance and, therefore, undue reliance should not be placed on them. We refer everyone to our funds with the Securities and Exchange Commission for more detailed discussion of the risks that may have a direct bearing on our operating results, performance, and financial condition. I'll now turn the call over to Michael.

Hi, everybody. Happy Valentine's Day. First, I want to have Anthony explain where we stand in terms of our balance sheet. and the comparison with December of 2021, that quarter, compared to the current December 2022 quarter. Anthony, could you do the honors?

Yes, sure. Good morning, everyone. Our balance sheet remains strong. Our cash in CDs is $24.5 million, which the CD is now cash. It matured on January 8th. Our total debt at at the end of the quarter was $21.6 million. Total equity was $61.1 million. Significant changes were, you know, we had a $4 million decrease in accruals that related to the utilization of catering deposits from the year-end amount because of all the parties held in December and the payment of bonuses and the payment of the FICA taxes that were deferred because of the CARES Act. So there was a number of accruals that were paid for in the quarter. So that came down along with the cash balance on the end of the year. On the P&L, a couple of things I wanted to point out. On the food and beverage sales, as a percentage of sales, we came down from the prior year quarter. We're now in line with about where we were pre-pandemic. We've done a good job of targeting price increases as well as buying smartly. Payroll, obviously, you see a big increase there in payroll. You see the news record on employment. It's still a challenge. We feel like we're getting it under control. But again, as a percentage of sales, It is spot on with the last quarter prior to the pandemic. The quarter ended December 31st, 19. It was the same percentage, 34.8% sales. On the occupancy expenses, we're up about $900,000 from the same quarter last year. That's the result primarily of three factors. Last year, we recorded... the COVID abatement deals for Bryant Park, which obviously the rent expense was artificially low last year. So that was about $300,000 of the increase this year. Las Vegas rents went up on 1-1-22. So that's about another $300,000 of increased rent this year over last year. And about $220,000 of it is insurance premiums, which increased Other operating costs and expenses, that's really just inflation-related across the board. That's really it on the P&L. So other than that, it was a strong quarter.

I'll turn it over to Michael. Thank you, Anthony. So I just want to emphasize that the way we – went about signing these Las Vegas leases. We could not, the rents were, the new minimum rents took effect in January of 2022. However, we could not book those new minimum rents until we had signed leases. So we didn't accrue for them. Our accountants were adamant that we shouldn't accrue until we had signed deals. So the minimum rents were pushed forward. And in the December quarter, we expensed more in minimum rents than the actual minimum rents would be for that quarter because we had this delay until we could book them. So if I were looking at the quarter and roughly $4 million last year, $600,000 of that, and $3 million this year, $600,000 of that decrease. $300,000 was because of the accounting for the rent that we did not have to pay, the reduced rent on our deal with Brian Park. And so we had a... a decrease in the rent in the December 2021 period, and there was an increase of about $300,000 due to the Las Vegas deals in the 2022 period. I think Anthony probably explained it better than I did, but I hope I have explained it. All in all, our business for the quarter was very strong in Vegas, Alabama, and New York. New York benefited dramatically from events. that were missing in much of certainly last year and in the December 2021 quarter. We also benefited somewhat from weather. There's been no snow in New York. The temperatures have been, with the exception of Christmas Day and a couple of days on either side of that, the temperatures have been unusually favorable for us. We did have this blip in Florida. So we're doing well with events in New York and Washington, D.C. The Vegas numbers were very strong. Sales were very strong. Alabama did what we would expect. But Florida, starting after Thanksgiving through the end of the quarter, weakened. Part of that is, again, this problem with Rustic that we've been having because our Our costs went up, our menu prices went up. We were still running 50% costs, trying to hold on to customer accounts. So we were not really aggressive in pushing menu prices in Rustic or anywhere else to that matter. But customer accounts in Rustic dropped dramatically. And, you know, revenues were down probably 17%, 18%. in the quarter and rustic and the other restaurants were off seven, eight, nine, 10%.

It was very, very cold in Florida from the 23rd to the 29th. It was like 30 degrees down there.

Yeah. So that doesn't help. But in January, we've seen a significant reversal of that and our restaurant's are significantly ahead in January in Florida than they were in the same January period last year. So I don't know what that blip was, but we're very confident that our offices in Florida are very, very strong. And restaurants like Shucker's, somewhat because of menu increases, but also increased head counts, are running 20% ahead of last year in January. Blue Moon is running ahead. We've added about 50 seats at Blue Moon as we got permission from the Army Corps of Engineers in the city to extend the dock that goes into the intercoastal waterway. So we had about 50 seats there and we're in season and they're being utilized. JB's is doing very well. We had a record week last week at the Hog Rock where we do fast food. Our normal week there is maybe 175, 180,000. We've hit 200,000 a couple of times. Last week we did 220,000. So campus seems to be strong. Everything I hear about the demographics attempt is favoring us. New York, because the weather has been mild, January we had a great business in New York and Washington, D.C., The big problem for us in this March quarter is not revenue. We're closing Gallagher's in New York for renovation, which is part of our lease negotiations. So we expect that renovation to take about two weeks. It started this past Monday, last Monday, I think, the 6th or whenever that was. It'll last until the end of March. We're trying to hasten that. We were able, out of some 300 seats, to cordon off 60 seats in a private dining room that's still serving Gallagher's menu. But Gallagher's is a restaurant that can do $350,000, $400,000 in a week, especially when there are conventions in town. So my expectation is that we'll be missing some $2 million in sales in the March quarter. in Gallagher's We've always had this policy When we close something for renovation, it's not the employees fault It's you know management's fault from making that deal in this case with MGM and So we are paying salaries a certain percentage of salary of their salaries So that our employees are not harmed so this is going to be a hit to our income for March. What we are building in terms of the renovation, I think, is a far more attractive restaurant. It's a restaurant that's very much in demand. It has become more so with the activity in MGM's park and the T-Mobile arena with the Black Knights hockey team and concerts just being outside our door. MGM is also in New York, New York, put in the new Cirque du Soleil show, which is doing well and it's well reviewed. And I think we're benefiting from that throughout all our restaurants and fast food operations in New York, New York, but Gallagher's is at the front door of the, of the theater. And we, we should benefit from that. And so this renovation, I think is going to be us, significant for us in revenue improvement. Other than that, our business, quite honestly, is pretty strong across the board. Our numbers are somewhat whipsawed based upon what happens with food prices, but that seems to be stabilizing. We have hired the right people in the right positions. We're paying a little bit more, but I don't think we're suffering in terms of finding the right people. Most of our positions are filled. The cost of labor is going to continually be a problem, but not finding the right people, which was difficult for us for a couple of years, seems to ease dramatically. So I think that should give you a flavor for what's going on. I'd like to address the Meadowlands, which is pretty much the same quarter to quarter. We think we have a very good chance of getting a casino license for the Meadowlands. We think the catalyst for that is the downtown or downstate casino licenses that are going to be issued by the state of New York for areas in and around Manhattan. The Meadowlands is six minutes from Manhattan on a good traffic day, 20 minutes, 30 minutes by bus or train. And I don't think Jersey will respond anything but favorably to having a casino license in the north once the state starts to move forward with issuing these licenses. Atlantic City would which has been killed anyway over the years, will be further hurt. The state of New Jersey will be missing a lot of revenue. I don't think they want their citizens going across into Manhattan to gamble. I think that that's the key transition point for us when there'll be serious discussions about having a license. Meadowlands is an area that has no residential. It's environmentally approved for a casino already. We don't think there'll be any lawsuits. The racetrack is already built to hold the first phase of the casino. So I think we can expect that this will be very favorably looked upon. And with that, you know, any questions, I'm happy to answer them.

Thank you. We will now be opening the line for questions. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for your questions. Our first questions come from the line of Roger Lipton with Lipton Financial Services. Please proceed with your question.

Good morning, Michael. Good summary as usual. Just one quick question. I was a little confused on whether the rent situation, which you talked about catching up in Vegas and where else was it? I forget now. Whether it was $300 or $600 in total. Was it $300 in Las Vegas? Oh, and the other, they're just confusing, whether it was three plus three or six plus three.

No, it's three plus three. The three in the December 21 quarter was a reduction of rent because we signed or finalized an agreement and signed an agreement with the Bryan Park landlord, which which we always knew we had that deferment of rent that became just a forgiveness of rent. And that was signed in that December 2021 quarter. So the $300,000 became a deduction from our regular rent payments. So it sort of skewed the December 2021 quarter by $300,000 of increased income.

Okay, that's fine. Thanks very much.

I'd like to point out that, you know, the Vegas leases, the minimum rent that we're paying now, we pay percentage rent. So once we get to a revenue level where the base rent is a certain percentage of revenue, Then we start to pay percentage rent. It's a break point and a natural break point. So the minimum rent becomes a moot point. We're basically on a percentage rent at that point, and the annual rent will be based upon what the percentage is. And our percentage rent... is slightly higher than it was in the old lease, what we pay. In America and Gonzales, it's 1%. At Broadway Burger, it's actually reduced a little bit. So we think we're a percentage rent-to-payer. We don't think the basic minimum rent

will affect our profitability at all in Vegas. I hope that helps.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next questions come from the line of Paul Johnson. Please proceed with your questions.

Yes, good morning. Just on the Meadowlands, Can you give just your best guess? It can be a wild guess in terms of the possible timing. I realize it's forces beyond our control, including government officials and all that. But what would be your best guess if you had to make one?

I think you got to – I differ a little bit from my partners. We're the third largest shareholder globally. A developer named Jeff Corral in New York is the largest shareholder, and then Hard Rock is a 20% shareholder. And I guess on a fully diluted basis, we're 7.8% of the casino. I want to remind everybody that we have exclusivity on all the food and beverage if the casino is built, with the exception of a carve-out for a Hard Rock Cafe. So... My partners strongly believe that it's not the issuance of downstate licenses that will be the tipping point to get New Jersey moving, but really to have casinos open in New York and New Jersey to see what that's doing to Atlantic City. I take the attitude that once they This whole thing will go into motion once they start to issue licenses. And if they issue a license in Manhattan, and there are several groups, Related being one of them, and Hard Rock being another one, by the way, interested in casino licenses within the Manhattan area, not in Queens and not in Long Island. I would think that would be enough to get New Jersey moving. So I think we're a year away from that. And then it has to be a referendum to change the state constitution to allow for a casino outside of Atlantic City. So I think, you know, we're two years away. That's what I think.

That's helpful. Thank you. And are there... What is the governor's position or the senator's position? Has there been any conversation among the higher level politicians?

Murphy has always been in favor of it, from what I'm told. I think he's had some direct conversations where he has said that. The legislature, I think, is more inclined positively than they have been in the past because the new legislative body from the last election, I think is, is, is better for us. If I look at the key people who would move the legislation forward. So I think the situation has improved, but it's still very speculative, you know, so.

Understood. Thank you. And then can you give us an update on any possible acquisitions and, and, Are we correct in sort of thinking that the acquisitions that you'd like to make are going to be more and more in the southeast and the Gulf states, or has that just been the recent trend?

I'd like to say one more thing about the Meadowlands, just so you get an idea of why we think we're in such a strong position. The Meadowlands does more sports betting than all the Atlantic City casinos put together. And I think it's either the first or second best sports betting site in the country. So there would be an inclination, I think, given that traffic and the amount of betting that's already taking place at the Meadowlands, that that would be the favorite site for a casino in the north. So in answer to your other question, we're constantly looking. We happen to have two very smart business brokers in Florida who show us deals. Recently, we've been looking at four deals. We sort of discarded, and we look, and we go visit, and we kick the tires, and we have our criteria. You know, two of those deals are very much focused on them. No documentation has been signed for either one. I would expect we would do one of them in the next two or three months, maybe both of them. But, you know, I have a high hope and feeling that that will get to terms, fair terms for us in the seller on one of these deals. We're always looking. The Southeast is very attractive to us for a series of reasons. Number one, it's business friendly. New York is not business friendly. I would never build another restaurant in New York. The amount of business we can do in Florida equals anything that we can do up here, given the size of the sites and where they're located. And the rents are substantially less. The legislators are more favorably inclined than New Yorkers to pass business laws that don't add additional expenses to operators. So, yes, we're focused more on Florida and the southeast than the northeast.

Thank you. You know, I guess, you know, part of as long-term investors, I mean, you guys have done a great job, certainly, and the acquisitions you've done have been at super multiple, super low. You know, the challenge with having sort of a decentralized restaurant base that doesn't have sort of a common brand, is that, as you noted in your 10K, I think your terminology was something like, you know, fixed costs don't decrease proportionally with sales. So, you know, the hard thing is how do you ever get to much higher levels of EBITDA, leaving aside the Meadowlands opportunity, unless you just have a lot more restaurants to spread over that fixed cost base?

So, it's certainly a fair question. And if you just look at the stock price over time, it hasn't moved very much. But we have been a dividend payer, and we paid a couple of special dividends along the way. We're very aware of your comment. And the, I guess, You know, if I go way back, and I'm going 25 years back, when we did the Las Vegas deal, you know, all of a sudden we were doing, in those dollars, $35, $40 million in one location. And we said, that's the model we want to replicate. We want to find those locations where we could put in a lot of different concepts and have the economics of one general manager, one executive chef over 7, 8, 10 operations in one site. That never worked for us. We were never able to find the site. We came close twice. We were very close pre-pandemic, and then pandemic shut down that idea. We were looking at a site in the Midwest, And the developer and us just decided during the pandemic not to go forward. So that was always the idea. Then what happened is when we bought Rustic, you know, Rustic was doing a million and a half dollars. And for seven and a half million dollars, we bought the million and a half, but we also bought the land underneath it. And we thought it was a mispriced restaurant back then. And we thought we could improve the million and a half. And the economics of doing a sales leaseback were, you know, usually favorable. I mean, if somebody, you know, it didn't make a difference to the cap, but I'll use, you know, if we were going to pay somebody a million dollars for, you know, on a sale leaseback, if we're going to pay a million dollars in rent, we thought we can get, you know, $12 million for something that we paid $7.5 million for and still have an operation doing $500,000. And by the way, that operation grew from doing a million and a half cash flow pre-pandemic to 3.4 million. So, you know, and every restaurant that we acquired in Florida where we had to land or in Alabama, those dynamics were were working. Now, they're working less with a 6% interest rate, you know, today than they were when interest rates were 2% or less, I guess. But we were looking to build, at that point, you know, our eyes opened up and we said, hey, let's try to buy the real estate. And you can't do that in New York, but you certainly can do it in the locations we were looking at in Florida and Alabama. So those are the primary situations we look at. Now, on Blue Moon, we couldn't buy the real estate, but we bought an operation that was making $1 million a year for $2.7 million, and we negotiated a 26-year lease, a new 26-year lease contract. with the landlord. So 26 years, it's not quite the same as owning it, but it's pretty close. So those are the situations we're looking at. They're one-offs. We're not going to look at anything that earns less than a million dollars. That's sort of the jumping-off point. But we've seen a few things that do much better than that, haven't been successful coming to the economic terms that we want to dictate to ourselves, but they're out there. And I think that's the way we're going to grow. Obviously, we have great hopes for the Meadowlands, and that would sort of follow this idea of what we did at New York, New York. If the Meadowlands became a casino, I'm sure there are eight or ten restaurants in there, a few bars, and that could be a $50 million, $60 million business for us. You know, we have a balance sheet that's, you know, from my point of view, underleveraged, and we also have credit lines beyond that. So we're prepared to do, you know, a bigger deal if one came along. We just haven't found one with the right economics. So we're sort of growing, you know, marginally with one-offs. But that should be the expectation, honestly, until we show you that we could do something bigger than that.

I appreciate that. Thank you for that, Kelly.

Thank you.

Our next questions come from the line of Moe Chateau with RMR Capital Partners. Please proceed with your questions.

Hey, Michael, great call as usual. Most of my questions were answered thoroughly. I just had a question about the operating lease liabilities. I just want some color. In terms of leases that you guys have signed, are there any corporate guarantees associated with them? What portion do you expect that you would own if you had to shut down a restaurant, or is that unique to each location?

We don't cross-guarantee anything here. There are no corporate guarantees on anything we do here.

Excellent.

That was nice and easy. There might be one or two out there, Michael.

Like what, Anthony? I don't recall any. Isn't Robert guaranteed by ARC?

No.

I think there's one or two, but I'm not sure which ones. I mean, we could follow up with you offline, Mo. Yeah. I don't recall anything. I trust Michael's memory better than my own, so I'll check it for you.

Thanks so much, guys, and great call.

Our next questions come from the line of Jeffrey Kaminsky with JJK Consulting.

Please proceed with your question. Good morning, guys. Good morning, Michael. Just a follow-up to A comment you made regarding share price and dividend. I think you said in the financial recap earlier that numbers are back to pre-pandemic 2019 quarter. Obviously, the dividend was eliminated during the pandemic for obvious reasons, and stock prices have been relatively flat at some of the volatility during the pandemic. Obviously, there were some of these swings. That said, given the current state of finances, and also, you know, the interest rate environment being what it is. You know, as shareholders, we kind of got swirled. Even if the stock didn't do anything, we got paid to wait by what was a better dividend than we're getting now. Is there any discussion, consideration about opening the dividend back to pre-pandemic levels or perhaps some sort of special dividend? You know, as shareholders remain patient, waiting for the next move.

Thank you. Jeff, how are you? Jeff, every board meeting, we discuss the dividend. And as our balance sheet has been bolstered by two things, the businesses are doing better, obviously, and we're not finding ways to spend our capital or our cash on a balance sheet fast enough. We discuss it. Look, my interest here honestly, and I, you know, I'm fortunate. My family has assets away, you know, significant assets away from this business. My goal has always been to protect my shareholders. And maybe I've been a little bit too conservative along the way. Maybe there were deals we should have done where we should have been more aggressive about bidding for them. Maybe leases that we should have signed that required a guarantee that I didn't want to put the company on the line for but but the goal here has been to protect the shareholders and We've never had you know a lot of debt we've never been in a position where we can service the debt that we did have and and so That conservative nature is sort of shared by most of my board members. We have a couple of board members that would be more aggressive with the dividend than the majority right now. But it is up for discussion. And every quarter we discuss it. And I think as we get further away from the pandemic, the likelihood is that we will revisit the dividend and and there may be an increase. But right now, we like the cash position we're in, and we like our balance sheet. Got it. Thank you, guys.

You're welcome. Thank you. Our next question has come from the line of Roger Lipton with Lipton Financial Services. Please proceed with your question.

Yeah, Mike. Mike, apropos of that capital allocation, I was going to ask, and I will ask, what will be the timing of your CapEx in Las Vegas? How much will you spend and when?

So this year, our obligation to MGM, we have essentially three leases out there, all of which, there are three leases and there are also letter agreements. So letter agreements sort of cover you know, the banquet business, the room service, pool service, the employee dining room. None of those things need renovations. The three main leases are for the village streets, which is sort of like a fast food area, America, which is, you know, their 24-hour restaurant that we have, and Gallagher's. The obligation this year for Gallagher's is certainly under $2 million, probably a million and a half, but we're just in the process, and we don't know if there's going to be cost overruns, but we think Sam and Jennifer, who are the key players along with the local people in Vegas, but the key players here, have really gone over those numbers with Linda Klaus, who's our facilities manager and oversees construction as well. The likelihood is $2.5 million in CapEx. But please remember, beyond that, we're paying people who work for us there, you know, 70% of their salaries are even though they're not working, which we're utilizing them for other things where we can, but there's a staff there that's being paid. So if you included that, I guess that number goes to $2 million with the payroll. We don't have any obligation for the rest of this year other than to give them a plan for the village streets. And I don't think the village streets will be very expensive, maybe $2 million. There are, I think, eight outlets in the village streets, and we're considering building one more. So maybe a couple million dollars. Would that be close, Sam? Yeah. Sam's shaking his head yes. And he's smarter about this than I am. So figure $2 million. And then America comes up in 2025. And America's doing great. I mean, we've had 11% compounded growth there last year from the previous year. And we're running ahead this year. And I don't know that we'll ever have to do America. It's basically New York and MGM's call. But they've taken a wait and see attitude because the restaurant's doing really, really well. So it's, you know, certainly the CapEx in Vegas is not a factor when you, I think you're trying to look toward the dividend and see if that would be impactful on the dividend. We're not concerned about that when we make a decision about the dividends.

Mike, just real quick, that sounds like $4 million combined maybe, including the payroll. That's lower than the numbers you had thrown out previously, if I recall correctly.

Yeah, well, the total obligation was $7.5 million, but the majority of that was going to be spent in America.

Ah, okay. Okay, well, that's good news. Okay, thanks very much.

You're welcome. Thank you. There are no further questions at this time. I would now like to hand the call back over to Michael Weinstein for any closing comments.

All right. I hope I was clear. It's Valentine's Day. Happy Valentine's, everybody. And we'll see you at the next quarter call. Take care.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.